Kreller Hot Topic Report | Careful What You Wish For: Lessons From Wal-Mart Brazil

Posted By:
Kreller Group
July 23, 2019

by Lauren Caryer, PhD

Brazil Expansion Goes South Due to Compliance Issues
Despite well-documented missteps in Germany and South Korea, the late 2000’s were a dynamic time for Wal-Mart’s expansion efforts worldwide. Beginning with forays into Canada, Mexico and the UK in the mid-90’s, by 2015 Wal-Mart International had become an empire unto itself, operating in 26 countries and accounting for over a quarter of the retail giant’s net sales. Quoted in an August 2, 2006 New York Times article, Deutsche Bank analyst Bill Dreher stated “I’m hard pressed to name a U.S.-based general merchandise retailer that is doing better than Wal-Mart International.” This explosion in growth was especially evident in Brazil, following Wal-Mart’s 2004 acquisition of the 118-store Bompreço chain and a 2005 purchase of the 140-store Sonae chain. As noted in a December 14, 2005 piece by MarketWatch, the $757 million Sonae deal nearly doubled Wal-Mart’s presence in Brazil. Wal-Mart’s Annual Reports also touted this expansion, charting the chain’s presence from 15 stores in 2000 to 434 units at the close of the decade.

However, the recent conclusion of a multi-year investigation into Wal-Mart’s international operations underscores the risks of such a single-minded focus on growth. On June 20, 2019, Walmart agreed to pay $282 million in fines following a civil suit and criminal charges filed by the U.S. Department of Justice alleging violations of the books and records provision of the Foreign Corrupt Practices Act (FCPA) by the company’s subsidiaries in Mexico, India, China, and Brazil. The criminal charges brought against Wal-Mart’s Brazilian subsidiary, WMT Brasilia S.a.r.l. provide a useful cautionary tale when thinking through the possible hazards of expansion into high-risk territories without clearly defined and adhered to anti-bribery policies and procedures.

According to the Statement of Facts outlined in WMT Brasilia’s plea agreement and Walmart Inc.’s Non-Prosecution Agreement, WMT Brasilia’s subsidiary, Walmart Brazil, hired a local construction company (referred to in the filings as “Brazil Construction Company”) to build eight new stores from 2008 through 2012. Despite being aware of corruption risks in Brazil as early as July 2000, Walmart did not perform a due diligence review of the construction entity prior to initiating the contract, and when a preliminary due diligence review was conducted in late 2009, the construction company failed. However, as Walmart Brazil’s Ethics and Compliance Department had no protocol for handling failed contractors, the construction company continued working for Walmart Brazil. Around that time, the construction company was tasked with retaining a third-party intermediary (TPI or “Brazil Intermediary”) to assist in obtaining construction permits for Walmart Brazil. The Brazil Intermediary earned a reputation for his ability to swiftly obtain permits by “sort[ing] things out like magic” and became known within Walmart Brazil as the “genie.”

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